If people underestimate the effects of expansionary policy, an increase in the growth rate of aggregate demand will tend to increase real GDP:
A)in both the short run and the long run.
B)in the short run but not the long run.
C)in the long run but not the short run.
D)in neither the short run nor the long run.

Question

If people underestimate the effects of expansionary policy, an increase in the growth rate of aggregate demand will tend to increase real GDP:
A)​in both the short run and the long run.
B)​in the short run but not the long run.
C)​in the long run but not the short run.
D)​in neither the short run nor the long run.

Quizplus · Accepted Answer

In the short run, an increase in growth rate of aggregate demand will increase real GDP due to increases in consumption, investment and government spending. However, in the long run, prices also adjust, leading to an increase in input prices, wages etc., resulting in less increase in real GDP. Therefore, the increase in real GDP is only seen in the short run but not in the long run.

If People Underestimate the Effects of Expansionary Policy, an Increase